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Badilisha Lugha KISWAHILI

Informal sector evades Sh86bn yearly

4th March 2012

The government is losing billions of shillings which remain uncollected due to failure to incorporate informal business enterprises in formal identification arrangements for inclusion in the national tax base.

It was revealed that the government would collect about Sh86 billion annually by having small retail enterprises and informal tourism operations formalised.

Dr Patrick Mugoya, principal of the Institute of Tax Administration (ITA) and a researcher in the area, told a press conference in Dar es Salaam yesterday that the amount remaining uncollected in the retail business was about Sh80 billion a year.

Dr Mugoya was making a presentation on the second phase of the small business formalisation programme (otherwise known as Mkurabita), as part of formalising the economy as a whole.

The study is being undertaken under the umbrella of East and Southern African Universities Research Programme (ESAURP).

Mary Kalikawe, cluster development specialist at the Tanzania Private Sector Foundation (TPSF) who conducted research on size determination and potential contribution of small scale informal tourism to tax coffers, said there was net taxable tourism income of about Sh30 billion. Since taxes were charged at a gross rate of 20 percent for such income, it would yield Sh6 billion a year through taxes.

Dr Mugoya said there is a problem in the tax regime because of presumptive taxes requiring every small businessman with an annual turnover of one to three million shillings to pay tax amounting to Sh35,000 annually. “This needs to be adjusted and start at a certain figure as it is the case for employees earning up to Sh135,000 who are not subjected to any tax,” he declared.

The tax administrator noted that if the tax threshold was not looked into, it would remain a barrier to harnessing tax dues from a vast number of small enterprises, operating informally.

On the size of the informal retail trade sub-sector, the study concluded that in 2011 there were about 1.2 million persons working in informal retailing.

About 32 percent of the 3.8 million informal sector workers were in retailing, with the number of informal retail units standing at about one million.

“The study also finds that three quarters of workers in the sub-sector are self employed. In terms of tax revenue potential the study concludes that at a compliance rate of about 50 percent over Sh80 billion could potentially be raised in the form of presumptive income tax and PAYE (Pay as you earn) tax revenue.”

Kalikawe told the gathering that in the tourism sector the survey noticed that over half of informal tourism entities enterprises do not keep records as 50 percent reported they do not pay tax, 70 percent have no Tax Identification Number (TIN) and 75 percent have no bank accounts.

Prof Nehemiah Osoro of the University of Dar es Salaam who surveyed the services sub-sector such as food vendors and motorcycle transportation said that 53.5 percent of the entrepreneurs did not pay taxes and 54 percent had no TIN numbers.

“A good section of them did not even know what TIN numbers mean,” he said, noting that study findings revealed that 64 percent of such entrepreneurs had no bank accounts.

“We need to educate our people so that they comply to keeping records accounts books and pay the required taxes as there is no way they can pay taxes without keeping records,” the don emphasised.

ESAURP executive director Prof Teddy Maliyamkono said the second phase programme dealt with micro, small and medium entrepreneurs in sectors such as tourism, mining, forestry, fisheries, retail trade and services sectors.

“The main aim of these studies has been to propose where capacity needs to be built, skills need to be developed and perceptions challenged in order that entrepreneurs willingly translate into the formal sector,” he explained.

This stage of research would result in reports and further popular books towards the end of 2012, while the third phase had attracted interest from Kenya, Malawi and Namibia. It is designed to implement proposals made in the second phase, he stated.

Informal businesses were small or relatively small in scale but in times of change or civil disturbances, they can grow rapidly to become large and profitable enterprises, he said. The turnover rate of small enterprises and informal sector activities is also quite high, studies indicate.

“It was estimated that in the year 2000, the informal sector constituted 18 percent of the economy in OECD countries, 38 percent of the economy in transition countries and 41 percent in developing countries. It was estimated that 58 percent of the Tanzania economy was in the informal sector at that time,” he further noted.

The study drew researchers from Malawi, Kenya and Namibia apart from the host country, Tanzania.

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